Agreements of Plaza

The agreements of Plaza are an agreement on the Foreign exchange rate signed on September 22nd, 1985 between the the United States, the Japan, the FRG, the the United Kingdom and the France (i.e. the G7 without the Canada and the Italy).

These countries agree, inter alia things, to intervene on the foreign exchange market in order to depreciate the course of the US Dollar compared to those of the Yen and the Deutsche Mark.

The agreements are signed with the hotel Plaza of New York.

Motivation

After the end of the Accords of Bretton Woods, in March 1973, the large countries realize that the " Leave-to make " on the foreign exchange market does not function perfectly. It became necessary to follow common policies of stabilization of the Foreign exchange rate, by intervention coordinated on the foreign exchange market.

The reasons of the need for this Dépréciation are the following ones:

to stop the speculative bubble on the US Dollar;
to reduce the US deficit of the current Balance, which had reached 3,5% of GDP;
to decrease the trade surpluses of the Japan, and to stop the worrying growth of its Investment S, in particular Real S, with the the United States.
to support the fall of the American unemployment rate, still raised, which had reached a level record in 1982.

Effects

Ten billion dollars are spent on the foreign exchange markets.

The agreement of Plaza had the effect discounted on foreign exchange rate of the dollar, compared to the mark (in hardly fifteen months, the dollar erases all its profits compared to Deutsche Mark and, at the end of 1986, it is found on its low historical level, that of 1979), and especially compared to the yen (foreign exchange rate dropped by 51% in two years).

At the Agreements of Louvre, in February 1987, the countries put an end to the interventions on the foreign exchange market, considering the depreciation of the dollar sufficient and wanting to avoid a “crash landing”. In spite of that, the exchange value of the dollar continues to drop, under the effect of Spéculation S on its Foreign exchange rate.

Effects of the long-term

In an extremely visible way and enough rapid, imbalances born of the cacophony of the agreements of Plaza and Louvre will lead to a big rise of long-term interest rates and with the Krach unites the October 19th, 1987 bond markets and markets of actions.

Later on, the most important consequences of the agreements of Plaza relate to the Japanese economy: very dependant on the Export S, this one is immediately and particularly sensitive to the fall of the dollar and, to fight against a recession which she considers inevitable, the Banque of Japan lowers five times its Discount rate between January 1986 and February 1987, bringing back it of 5,0 % with 2,5 %.

But the Japanese economy is also sensitive to the methods of the fall of the dollar: the country accumulated a important saving external, mainly in dollars, precisely, and its repatriation throughout 1986 (to avoid the losses in value related to the depreciation of the dollar), whereas the domestic Interest rates drop, brings a big raise in the price of the other placements available: action S and Real. The " Japanese financial bubble " end of the year 1980 is being born.

Since the unhappy episode and especially badly controlled of 1986-87, the G7 became careful and an intervention concerted on the foreign exchange market is more conceivable only to ensure the " stability of the marché" , according to the devoted formula, and not to try to reverse a tendency.

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